Defer Up-Front Fees - AccountingTools

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Defer Up Front Fees

You must defer the revenue recognition of up front fees in many situations. For example, a fee may involve the conveyance of a license, or the delivery of a product or service where the customer would not have paid the fee if the seller were not involved on a continuing basis with the provision of additional services. For example:

Access fee. A web site that hosts a variety of databases charges a fee to its customers for unrestricted access to its data, which requires minimal additional cost by the web site once the user has been given access to the system.
Activation fee. A phone company mandates an activation fee when it sets up phone services for a new customer, as well as monthly usage fees.
Hosting fee. A web hosting company charges a fee for hosting a customer’s website, where most of the cost is incurred during the initial installation.
Initiation fee. A health club sells a membership to a customer, which includes an initiation fee and a continuing monthly fee.
Listing fee. A web site charges advertisers a fee to list their products on its web site for a designated period of time, where there is a minimal cost associated with the advertisement during the period when it is posted.
Technology access fee. The holder of intellectual property and research services requires its customers to pay a fee for access to its proprietary technology, as well as a periodic fee for its research services.

In all of the preceding examples, the SEC holds that revenue recognition of up front fees should be deferred, unless the fees are in exchange for products or services that represent the completion of a separate earnings process. In essence, customers are really purchasing the ongoing rights, products, or services that the seller is providing through its continuing involvement under the sales arrangement. Thus, the SEC does not consider such activities as selling a membership or providing initial set-up services to be discrete earnings events.